🇬🇧 GBP – Many of the hopes of the UK fall on Theresa May’s shoulders, as she flew to Brussels yesterday for emergency talks with EU leaders. May will hope to break some of the deadlock in Brexit negotiations, which caused the pound to drop as much as 0.3% yesterday. The UK prime minister attended the dinner with David Davis, and Jean-Claude Junker, and is the first meeting since April’s volatile post Brexit dinner. The EU side says that until “sufficient progress” is made on the amount the UK owes the EU when it leaves and the future rights of EU citizens, they will not be discussing the UK’s post Brexit relations.

The previous unwillingness of the EU to engage with the UK shows warning signs that a hard Brexit, or even a no deal is becoming more likely, which is causing GBP to slide. However the generally positive tone from both sides after last night’s dinner seems to have given some relief for the pound which now trades half a cent higher.

In terms of data, there was nothing out from the UK, and investors will now be eyeing the inflation reading this morning.

🇪🇺 EUR – The euro continues to enjoy a strong run as the UK continues to face uncertainty and investors favour the single currency. Two key obstacles in Brexit negotiations come from Angela Merkel and Emmanuel Macron. May spoke to Merkel on Sunday and tried last month to convince the German chancellor that a two-year bridging period after Brexit day would help both sides. So far EU leaders have refused to widen Barnier’s negotiating mandate to include trade or transition, and Merkel has been sceptical about a transition deal.

In terms of actual data out yesterday, it was fairly quiet from the Eurozone. Wholesale prices in Germany were released higher than expected. Also positive for the EU was August’s trade balance which was up to €21.6bn, showing steady demand for EU goods.

This morning we have Eurozone inflation readings which are expected to fall in line with the previous reading at 1.5%.

🇺🇸 USD – The greenback was slightly stronger yesterday, as investors repositioned following Friday’s disappointing inflation readings. The dollar index rose 0.13% to 93.215, and a US index of business positions rose to a 3 year high. Traders also expect the Fed to raise rates in December which will help to bolster the dollar. In terms of data, it was a very quiet start to the week from the US with no significant releases.

Our View: If things continue along the same vein as they have for May in recent weeks, the pound could be set for further punishment. Theresa May’s ability to get the ball rolling on Brexit negotiations again will be absolutely crucial for the UK, and will possibly supersede other economic data. We may see much of the movement in the morning following inflations readings.

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